Robert Kiyosaki isn’t everybody’s cup of tea. I was surprised to see this book on the shelves of the County Library and couldn’t resist it. You don’t often see some of the personal finance classics in a UK library, for instance I’d quite like to read the seminal Your Money or Your Life but it isn’t in the library. RDPD polarises opinion – some people find the book inspirational, some find it dire, and some people aren’t quite sure.

People that do that are usually worth listening to. They upset people because they challenge preconcieved ideas and comfort zones. They inspire others because they show them a new way of looking at the world. And they confuse others because they see the inspiration, and they see the awful flaws at the same time.

This book did the same for me, in a smaller way. It didn’t start off good with an intro by Steve Forbes and Donald Trump. The former seems to be somewhere to the right of Genghis Khan in outlook, the second an arrogant S.O.B. to boot.

The book itself was a maddening combination of utter bullshit and compelling and refreshing new thinking at the same time. Let’s start with the utter BS. The author clearly still carries around a large chip on his shoulder, it shows in some of the fictional writing, it shows in the clear fondness for the material trappings of richness. His alleged Rich Dad didn’t need those trappings of wealth, he drove an old car, a regular house, but Kiyosaki is a blowhard. He talks about the size of his…property portfolio. He talks about leverage, and though it is true that using other people’s money can help you get ahead, those other people usually like to charge you for the use of their money, which he doesn’t seem to factor into his hastily calulated ROI.

RDPD shamelessly plugs his other books and a fearsomely expensive board game in this book too. There is a strong sense of the get-rich-quick charlatan to the patter, and the motivational stuff is very similar to Paul McKenna’s book but the American style grates on me in a way McKenna didn’t.

So far so bad. What are the good bits?

He bangs on about passive income,which is correct, but not something I didn’t know. Where he did add genuine insight for me was

Rich Dad on Currency versus Money

Nixon’s abandonment of the gold standard (indirectly expressed in the Bretton Woods system) in 1971 turned the US dollar from money into currency. What he means is that previously it was a store of value, referenced against a finite good, as well as a medium of interchange. What it is now is a medium of interchange, and an unreferenced and depreciating store of value.

Now there are loads of people on the Net spitting bricks about fiat currencies and whatnot so this is hardly new, but it comes without the hyperbole that a lot of people succumb to when talking about fiat currencies. We probably needed fiat currencies to accommodate economic growth sponsored by the gift of oil over the 20th century – if the money supply can’t increase to match the increasing value of the goods and services in the economy then presumably a form of deflation occurs, which rewards old money and historic capital over new, which isn’t conducive to growth. We have experimental proof of that in most of European history, where old money was king, often literally, and growth was measured in the sort of amount per century that we demand per year. The trouble is that this flexibility of fiat has a dark side, which is the temptation for governments to manipulate the currency by creating money for them to spend. This increases the supply, thereby invisibly taxing stored value as more money chases the same goods and services.

The reason the currency is a poor store of value is because it is not synchronised to an independent arbiter of how much of it is in circulation, and indeed it is not referenced to anything which as an inherent value such as gold or silver. Sophists will of course grizzle that value is inherently relative. To a starving man a loaf of bread has far more value than 800g of gold, but I’m going to handwave my way through that. Assuming an inflationary, but still in control monetary system, gold and silver have an inherent value, currency does not, though it has a temporary, and decaying value. The half-life of the decay is longer than that of fresh fish, but historical precedent seems to indicate it is less than two hundred years. It’s still damned useful if you want to buy a newspaper, just less so if you want to give money to your future self, because a significant amount of it will fall off the lorry on its way to your future self.

Now I’ve already had to think about this in the tin hat portfolio, against serious decline due to peak oil etc, but assets that work well there are illiquid, usually indivisible, lumpy and not fungible. For non-apocalyptic situations where I want to store wealth, I could do with a currency that is backed with something real, so that buggers like Mervyn King don’t get to press the ‘make more money’ button and double the amount of money in circulation chasing the same bucket of goods and services, thereby taxing my cash assets at 50%. I don’t like that very much. I could whinge that it isn’t fair, but more constructively I could see if somebody is offering a currency that is backed by something that is real.

Here is an example of a currency backed by something real. Look carefully at the back. Or is it the front? I don’t know. The side with George on it, anyway, rather than the side with the symbol of the illuminati, the freemasons and the symbolism of the new world order. No, I didn’t mean that last stuff, I was just having a laugh with SEO keywords for conspiracy theorists, and showing I’ve read too much Dan Brown. He’s sort of like engine oil flush solution for the mind, but it obviously left some traces. I dragged out a genuine greenback from a trip to the States and the side that says ONE on it looks pretty much identical to the non-George side of this apart from the lizard.

A silver certificate

What Kiyosaki opened my eyes to is that, for the above example, a unit of a silver physically backed ETF is the same thing in many ways.

Of course, a non-physically backed ETF is a derivative product. Derivatives are basically smoke and mirrors used to sell something you don’t own, and I’d prefer not to to be a buyer of such given recent experiences.

Even a physically backed ETF company such as PHAU or PHAG is nowhere near as robust a counterparty as the US government – at least Uncle Sam is subject to getting voted out, or suffering the results of the Second Amendment, whereas the only thing that keeps PHAU or PHAG on the straight and narrow is whether Graham Tuckwell of ETF Securitiesfeels he can beat it quickly enough with the gold bars to stop getting put in the nick.

There are other aspects of counterparty risk with ETF Securities – they produce a number of derivative products. Say they screw up there, which is not unknown these days, then the value of the physical holdings of PHAU and PHAG will be set to the company assets and used to spread across all creditors, all of which will take a haircut. Thus the physical backing will not have the protection value PHAU/PHAG buyers thought they had at first sight.

For all that, this sort of ETF does seem to be a hedge against slow, slipsliding currency death of a thousand cuts that the repeated bursts of QE are doing. Of course, the tragedy is every other investor thinks the same, so there are some bubble dynamics in gold at least.

So I will hold on to my GBS ETF and get some PHAG ETF with this month’s saving while I think about what to do with my regular savings. As described earlier, these have no place in my tin-hat portfolio – for that I have to get physical and bury gold sovereigns at a crossroads by the light of the last quarter moon. It’s a tried and tested method with a long tradition 🙂

GBS/PHAG therefore become part of my regular portfolio. I don’t want to buy shares in October, because the yields and PE of what I want aren’t right and I’ve seen two market crashes in Octobers past and I feel another one is ripe. There is also a general note of QE in the air, not so much from the Bank of England but from the Fed, and where the Fed goes the rest of the world will follow. I accept the risk that if the US dollar goes down and ceases to become a reserve currency (likely in the next 5 years in my view) that this sort of holding will be written off and destroyed.

Hopefully there will be a stock market crash in the second dip, and I can buy myself an income at good rates via a UK investment trust at rock bottom prices. I would prefer not to have to eat this sort of counterparty risk by buying NS&I index-linked certs, but I can’t do that at the moment.

This is a risk. It is a serious risk to take. But doing nothing is also a risk. I have seen my UK wealth drop by 25% in the last year, simply due to the devaluation in the pound caused by QE. Of course, the number that Quicken tells me for my net worth hasn’t dropped by 25%, it’s exactly the same. And since the USD is dropping too there aren’t the other obvious warning bells. But the value of stuff that the £ buys is dropping rapidly, be it measured in radio plugs or loaves of bread.

This is not so much an issue for readers at the beginning of your working lives, since your wages will rise to some extent to compensate for inflation, but I am approaching the end of mine, so most of my wealth is in stored capital. So I am prepared to start taking chances to hedge it against the increasingly rotten currency. There is always the possibility that the gold price is in a bubble and will halve. There is precedent – you’d have been pig-sick to have bought in 1982. On the other hand, there is a virtually certain possibility that the currency will depreciate, that’s what quantitive easing is designed to do, which somewhat offsets the downside. Do nothing, and I will lose out anyway. Precious metals ETFs pay no interest, but the interest on my cash ISA isn’t enough to compensate for RPI, never mind the 25% depreciation in the £ over the last year or two.

The other thing that RDPD introduced me to was something I had moved towards instinctively, but he called it out explicitly.

Investors for Growth take more Volatility then Investors for Income

Eh what? His example was drawn from the property rental model that seems to be a large part of his claimed portfolio. Now I tend to look askance at anybody advocating having anything to do with property, because it has been nothing but a world of hurt for me personally. I don’t even trust Monevator and his REITs though I’m sure he’s right, but I don’t touch property with a barge-pole! Any sort of property at all, other than owning my house outright.

However, the pathologies of property do back up RDPD’s assertion, that the volatility of the value of the property is far higher than the volatility of the rent income. Something similar seems to apply to investment trusts, such as this

Nasty hairy ride for the growth investor

Nasty hairy ride for the growth investor

easier journey for the dividend investor

Easier journey for the dividend investor. Obviously the trick here is to get a decent yield, so it’s not like the share price is irrelevant when you buy, but the takeaway is that if you rely on the dividend income you will have less of a white-knuckle ride than if you rely on the share price growth. To make this work you have to do a Warren Buffett and choose carefully when to buy, and then hold forever. The income from dividends is lower than most people’s hopes for growth, so we are talking tortoise rather than hare. That means you need a lot of money to get an income – the yield is around the 5-6% mark.

I hadn’t read this article in 2009 which would have been the best time to load up, but the 6% yield I bought at was acceptable. I compared a number of UK ITs and of my shortlist observed a similar behaviour in the stability of the dividend relative to the share price. Naturally, under certain economic circumstances the centre cannot hold and everything will fall apart, but in a world where money is slowly dying on its feet due to sovereign debt and competitive devaluation there’s no such thing as risk-free.

Another insight that RDPD offered me, though one I only use in my tin-hat portfolio, is the concept of control. With paper investments, the only controls you have are to be in or out, and to some extent how much. You can’t influence the ouput from the investment itself. If you buy an asset that you can use to make money (say a business or a productive capacity) then to some extent you have more control – you can sell more or work harder if you come up short. Self-reliance is an important aspect of resilience against a currency collapse and resource crunches.

There is only so far you can go, however. Cans of beans are okay, but when you start stockpiling weapons and tin hats you’ve run out of road. You have to sleep sometime 🙂

Finally, though it isn’t relevant to me because I have no mortgage, RDPD correctly classifies a mortgaged house as a liability, not an asset. It only becomes an asset when you pay down the last instalment, whereupon it becomes a sunk cost with an ongoing revenue stream defraying the amount of rent you’d be paying (less maintenance, and in the case of US readers, property taxes. In the UK property taxes are per resident, so renters pay too). This is because apart from a few exceptions most people need a roof over their heads.

Not everybody understands in their bones why a mortgaged house is a liability and not an asset. You get know that, when there is a house price crash and you get to see what you owe on your mortgage is more than the value of your house. There is a deep knowledge you get from that experience that is hard to get any other way.

So I got good value from the time I invested in reading Rich Dad Poor Dad’s Increase your Financial IQ. Rich Dad would approve of me using other people’s money to invest in his book by borrowing from the library, so he would say my ROI was infinite. Yes, he is arrogant, and yes, he is a blowhard, and he probably makes up a lot of his anecdotes. But he looks at the world in a slightly different way from normal PF author, and because of that different angle, he sees things hidden from the mainstream. If you are independent enough of thought to isolate the nuggets from the dross, he many have something of value to say to you. I am chuffed that I didn’t financially support his brand, however, it looks like a rum operation to me.

I also think that the main value is him presenting personal finance from a different perspective than the conventional pf-author. A lot of people seem to get caught up on whether there actually was a rich dad or a poor dad. I don’t really care much like I don’t care about whether the Anne or the Bobs that most books these days use as personalized examples really exist. I probably also glances over all his anecdotes as they didn’t pertain to my situation. Another factor is probably that I only read the book and that I haven’t been talked into attending real estate seminars, etc. Anyways, I think if one can distill the concepts of the book, it’s a great book. To put it more accurately, the concepts in the book are great; but maybe the book in itself isn’t.